Profit menu mixed for restaurant chains

Jerry HirschTimes Staff Writer

Angela Pierce and her husband, Nicolas, used to enjoy a dinner date once a week. Now the Culver City, Calif., couple patronize restaurants just twice a month, thanks to gasoline prices that are more than 70 cents a gallon higher in Southern California than a year ago.

Unfortunately for the $175 billion U.S. sit-down restaurant business, the Pierces are not the only ones staying away from their favorite eating places. In the last few months restaurants such as Chili's, Cheesecake Factory and Applebee's--what analysts call the "casual dining" category that offers table service and alcoholic beverages--have recorded small but discouraging sales declines.

They are responding with discount burger specials, new menus featuring less-expensive items with smaller portions and by pushing the gift-card business.

The culprit, restaurant chains say, is soaring gas prices. But rising interest rates and increases in the minimum payments consumers must make on credit card debt have added to the problem.

Customers of casual dining restaurants "get startled when they fill up their SUVs, so they stop dining out or they trade down to fast food," said Michael Smith, an analyst with Oppenheimer & Co.

Restaurants such as Chili's and Macaroni Grill--both owned by Dallas-based Brinker International Inc.--have seen their sales at restaurants open at least a year, an important financial measurement known as same-store sales, fall in recent months. For all Brinker restaurants in July, same-store sales were off 2.7 percent.

A May survey of 400 consumers nationwide found that almost one-quarter reported spending less when they did eat out, according to Sandelman & Associates, a restaurant consulting firm in San Clemente, Calif.

The numbers were even greater for the people who said they made $25,000 to $50,000 annually. Forty-one percent reported eating out less, and 29 percent said they were spending less, Chief Executive Robert Sandelman said.

Cheesecake Factory was one of the first to detect the trend. With an average guest check of $17, it has seen same-store sales slide about 1 percent in each of the last two quarters.

"People are watching what they are spending," said Howard Gordon, the company's senior vice president for business development and marketing.

While its restaurants remain packed during the prime dinner and lunch hours--which is why the chain's sales-per-store average is $11 million a year, the highest in the industry--traffic has fallen off in the early evening and late at night, Gordon said.

The company, with 107 Cheesecake and seven Grand Lux Cafe restaurants, attributes the dip to a decline in the number of seniors patronizing the chain during the early dinner hours and a dip in teenagers, who often come in late at night. Both are demographic groups that may spend less than its other customers, he said.

Although the chain is still reporting revenue growth as it opens up new restaurants, including 17 more by the end of this year, the dip in same-store sales has spooked investors. The stock is on track to finish down in the first calendar year since 1996.

In a move to increase sales the restaurant is offering smaller portions of popular dinner items such as a $10.95 "Famous Factory Meatloaf" for lunch, a $3 discount from the full-size meal. The chain is known for its large portions.

The initiatives are a response to "what's happening in the restaurant world and how people are eating," Gordon said.The prospect of an industry slowdown has restaurant executives nervous, even if their own companies have not felt the effects.

So far, the gourmet pizza chain has dodged the downturn. California Pizza Kitchen recently said its same-store sales rose nearly 5 percent in the second quarter.

"We are a $12.80 average guest check positioned across America in generally upscale neighborhoods," Rosenfield said. "We are still an accessible luxury."

For some restaurateurs, a slowing economy might represent an opportunity.

"I can't quantify the degree, but we may be getting some of those guests from the casual dining restaurants as money gets tight," said Julia Stewart, chief executive of Glendale, Calif.-based IHOP Corp., which is considered a less-expensive family restaurant. IHOP has an average guest check of $8.61.

"There's a real mix of winners and losers in every category of restaurants right now," Stewart said. "When the consumer is so concerned about gas prices, the economy and world affairs, you need to have all the pieces working."

Jerry Hirsch is a staff reporter for the Los Angeles Times, a Tribune Co. newspaper.